Q2 2024 Sonic Automotive Inc Earnings Call
Operator: Good morning, and welcome to Sonic Automotive's second quarter 2024 earnings conference call. This conference call is being recorded today, Monday, August 5, 2024. Presentation materials which accompany management's discussion on the conference call can be accessed on the company's website at ir.sonicautomotive.com. At this time, I would like to refer to the Safe Harbor Statement under the Private Securities and Litigation Reform Act of 1995. During this conference call, management may discuss financial projections, information, or expectations about the company's products or market or otherwise make statements about the future.
Good morning, and welcome to the Sonic automotive second quarter 'twenty 'twenty four earnings Conference call. This conference call is being recorded today Monday August five 2024 presentation materials, which accompany managements discussion on the conference call can be accessed at the company's website at IR got Sonic automotive.
Operator: Such statements are forward-looking and subject to a number of risks and uncertainties that could cause actual results to differ materially from those made. These risks and uncertainties are detailed in the company's filings with the Securities and Exchange Commission. In addition, management may discuss certain non-GAAP financial measures as defined by the Securities and Exchange Commission. Please refer to the non-GAAP reconciliation tables in the company's current report on Form 8K filed with the SEC earlier today. I would now like to introduce Mr. David Smith, Chairman and Chief Executive Officer of Sonic Automotive. Mr. Smith, you may begin your conference call.
Speaker Change: Dot com at this time I would like to refer to the Safe Harbor statement under the private Securities Litigation Reform Act of 1995.
This conference call management may discuss financial projections information or expectations about the company's products or market or otherwise make statements about the future such statements are forward looking and subject to a number of risks and uncertainties that could cause actual results to differ materially from the statements made these risks.
And uncertainties are detailed in the company's filings with the Securities and Exchange Commission. In addition management may discuss certain non-GAAP financial measures as defined by the Securities and Exchange Commission. Please refer to the non-GAAP reconciliation tables in the company's current report on form 8-K filed with the Securities and Exchange Commission earlier today.
David Smith: I would now like to introduce Mr. David Smith, Chairman and Chief Executive Officer of Sonic Automotive's. Mr. Smith, you May begin your conference.
David Smith: Thank you very much and good morning everyone, and welcome to the Sonic Automotive second quarter 2024 earnings call. Again, I'm David Smith, the company's chairman and CEO.
David Smith: Thank you very much and good morning, everyone and welcome to the Sonic automotive second quarter 2024 earnings call again, I'm, David Smith, the company's chairman and CEO joining me on the call today is our president Jeff Dyke, our CFO Heath Byrd.
David Smith: Joining me on the call today is our president, Jeff Dyke, our CFO, Heath Byrd, our Echo Park Chief Operating Officer, Mr. Tim Keen, and our Vice President of Investor Relations, Mr. Danny Wieland. We would like to open the call by sincerely thanking our amazing teammates for delivering a world-class guest experience for our customers. Our Echo Park Automotive teammates achieved the top spot as the number one pre-owned automotive dealer and guest satisfaction, ranked by reputation.com, and our Sonic Automotive franchise teammates have achieved among the highest customer satisfaction scores in our industry and in our company's history. Our teammates are truly living our Sonic purpose, to deliver an experience for our guests and our teammates that fulfills dreams, enriches lives, and delivers happiness.
Speaker Change: Our Echo Park, Chief operating Officer, Mr. Tim King and our Vice President of Investor Relations, Mr. Danny Wild.
Speaker Change: We'd like to open the call by sincerely thanking our amazing teammates for delivering a world class guest experience for our customers.
Speaker Change: Park automotive teammates achieved the top spot as the number one pre owned automotive dealer and guest satisfaction rate by reputation dot com.
Speaker Change: And our standard automotive franchise teammates have achieved among the highest customer satisfaction scores in our industry and in our company's history.
Our teammates are truly living our sonic purpose.
Speaker Change: To deliver an experience for our guests and our teammates.
Speaker Change: Hill's dreams enriches lives and delivers happens.
David Smith: We believe our strong relationships with our teammates, our manufacturer and lending partners, and our guests are key to our future success. And, as always, I would like to thank them all for their support and loyalty to the Sonic Automotive team. We remain focused on our ability to adapt to changing market dynamics in the near term while positioning Sonic to achieve our long-term strategic goals. I'm pleased to report that we continue to make great progress in our Echo Park segment performance in the second quarter with record second quarter adjusted EVA DAW that outpaced our previous projections and sets the stage for continued growth in the second half of 2024 and beyond.
Speaker Change: We believe our strong relationship with our teammates our manufacturer and lending partners and our guests are key to our future success and as always I would like to thank them all for their support and loyalty to the Sonic automotive team.
Speaker Change: We remain focused on our ability to adapt to changing market dynamics in the near term, while positioning <unk> to achieve our long term strategic goals I.
Speaker Change: I am pleased to report that we continued to make great progress in our Echo Park segment performance in the second quarter with record second quarter, adjusted EBITDA that outpaced our previous projections and sets the stage for continued growth in the second half of 2024 and beyond.
David Smith: Overall, the Sonic Automotive team continued to execute at a high level despite operational challenges in the last 12 days of the second quarter as a result of the previously announced CDK software outage. As of today, Sonic's access to the information systems provided by CDK has been restored.
Speaker Change: Overall, the Sonic automotive team continued to execute at a high level.
Speaker Change: Slight operational challenges in the last 12 days of the second quarter.
Speaker Change: As a result of the previously announced CDK software outage.
Speaker Change: As of today Sonics access to this information systems provided by CDK has been restored.
David Smith: However, we continue to experience operational disruptions throughout July related to the functionality of certain CDK customer-lead applications, Inventory Management Applications, and Related Third Party Applications Integrations with CDK. As a result of the business disruption caused by the CDK outage, we estimate our second quarter gap income before taxes was negatively impacted by approximately $30 million or $0.64 in diluted earnings per share, which includes approximately $11.6 million or $0.25 in EPS related to excess compensation paid to teammates who had reduced income potential due to the CDK outage.
Speaker Change: However, we continued to experience operational disruptions throughout July related to the functionality of certain CDK customer lead applications inventory management applications and related third party applications integrations with CDK.
As a result of the business disruption caused by the CDK outage, we estimate our second quarter GAAP income before taxes was negatively impacted by approximately $30 million or <unk> 64 in diluted earnings per share, which includes approximately $11 $6 million.
Speaker Change: Or 25 cents and EPS related to excess compensation paid to teammates who had reduced income potential due to the C. D K outage.
David Smith: Second quarter EPS was $1.18 per share on a reported basis and excluding the effect of certain charges, as detailed in our press release this morning. Adjusted EPS was $1.47 per share, a 20% decrease year-over-year due to the effects of the CDK outage on our second quarter financial results. Prior to the CDK outage, we were tracking to have another great quarter of operating performance and financial results, and I'm confident that our team will continue to execute at a high level moving forward.
Speaker Change: Second quarter EPS was $1 18 per share on a reported basis and excluding the effect of certain charges as detailed in our press release. This morning.
Speaker Change: Adjusted EPS was $1 47 per share a 20% decrease year over year due to the effects of the CDK outage on our second quarter financial results.
Speaker Change: Prior to the CDK outage, we were tracking to have another great quarter of operating performance and financial results and I'm confident that our team.
Speaker Change: We'll continue to execute at a high level moving forward.
David Smith: Turning now to second quarter franchise dealership trends, we continued to see an expansion of new vehicle inventory levels across our brand portfolio, ending the quarter with a 59-day supply of inventory, up from 50 days at the end of the first quarter. This increase was driven in part by a slower sales rate in the last 12 days of the quarter, as well as certain models that were subject to a top sale order from the manufacturer.
Speaker Change: Turning now to the second quarter franchised dealership trends.
Speaker Change: We continued to see expansion of new vehicle inventory levels across our brand portfolio ending the quarter with a 59 day supply of inventory up from 50 days at the end of the first quarter.
Speaker Change: This increase was driven in part by slower sales rate in the last 12 days of the quarter as well as certain models that were subject to upsell order from the manufacturer.
David Smith: The rate of same-store new vehicle gross profit per unit declined moderately in a quarter to $3,590 per unit. We expect this decline in new vehicle GPUs to continue throughout 2024 and exit the fourth quarter in the low $3,000 range, but we continue to believe that the new normal level of new vehicle GPU will remain structurally higher than it was pre-pandemic, normalizing around $2,500 to $3,000 per unit range in 2025. Additionally, our team continues to work closely with our manufacturer partners to manage new vehicle inventory levels and better align powertrain options with evolving consumer demand, which should benefit inventory day supply, floor plan interest costs, and new vehicle GPU in the used vehicle market. Wholesale auction prices for three-year-old vehicles decreased 5% during the second quarter.
Speaker Change: The rate of same store new vehicle gross profit per unit declined moderated somewhat in the quarter to 3500 $90 per unit.
We expect this decline in new vehicle Gpus to continue throughout 2024 and exiting the fourth quarter in the low $3000 range, but we continue to believe that the new normal level of new vehicle GPU will remain structurally higher than it was pre pandemic.
Speaker Change: Normalizing around 2500 to $3000 per unit range in 2025.
Additionally, our team continues to work closely with our manufacturer partners to manage new vehicle inventory levels and better align powertrain options with evolving consumer demand, which should benefit inventory day supply floorplan interest costs and new vehicle Gpus.
Speaker Change: In the used vehicle market.
Speaker Change: Wholesale auction prices for three year old vehicles decreased 5% during the second quarter.
David Smith: While our franchise dealerships' average retail used pricing was flat compared to the first quarter, providing stability in the used GPU at $1,524 per unit on a same-store basis, elevated used retail prices remain a challenge for consumers contributing to affordability concerns amid the current interest rate environment.
Speaker Change: All our franchise dealerships average retail used pricing was flat compared to the first quarter.
Speaker Change: Regarding stability and they used GPU at $524 per unit on a same store basis.
Speaker Change: Elevated used retail prices remain a challenge for consumers contributing to affordability concerns amendments amid the current interest rate environment.
David Smith: However, the return to normal seasonal trends in used vehicle wholesale pricing is positive for our business outlook and should benefit affordability and used vehicle sales volume going forward. Our team remains focused on driving incremental used inventory acquisition and retail sales opportunities in 2024, driving upside in this line of the business alongside the expected normalization of used car pricing and volumes over time. Our F&I performance continues to be a strength despite elevated consumer interest rates, with Sing Store franchised F&I GPU of $2,380 in the second quarter, down 6% year over year but up 1% sequentially from the first quarter. The continued stability in F&I supports our view that F&I per unit will remain structurally higher than pre-pandemic levels, even in a challenging consumer affordability environment.
Speaker Change: However.
Speaker Change: The return to normal seasonal trends in the used vehicle wholesale pricing are positive for our business outlook and should benefit affordability and used vehicle sales volume going forward.
Speaker Change: Our team remains focused on driving incremental used inventory acquisition and retail sales opportunities in 2024 driving upside in this line of the business alongside the expected normalization of used car pricing and volumes overtime.
Speaker Change: Our F&I performance continues to be a strength despite elevated consumer interest rates with same store franchise to F&I GPU of 'twenty $380 in the second quarter.
Speaker Change: Down 6% year over year, but up 1% sequentially from the first quarter.
Speaker Change: The continued stability in F&I supports our view that F&I per unit will remain structurally higher than pre pandemic levels, even in the challenging consumer affordability environment.
Speaker Change: Yeah.
David Smith: Our parts and service or fixed operations business remains strong, with a 2% increase in same-store fixed ops gross profit despite lost productivity at the end of June due to the CDK outage. We are very proud of the success our team has had in this area, and we believe there are remaining opportunities to grow our fixed-offs business as we progress through 2024. As we mentioned previously, in March, we launched an initiative to increase our technician headcount by a net 300 technicians in 2024, which we expect would contribute an additional $100 million in annualized fixed ops gross profit. To date, we have increased our technician headcount by a net 131 techs and pasted nearly 30 new texts per month in Q2, positioning us well to achieve this goal in the remainder of 2024.
Speaker Change: Our parts and service or fixed operations business remained strong with a 2% increase in same store fixed ops gross profit. Despite lost productivity at the end of June due to the C. D K outage.
Speaker Change: We're very proud of the success. Our team has had in this area and we believe there are remaining opportunities to grow our fixed ops business as we progress through 2024.
Speaker Change: As we mentioned previously in March we launched an initiative to increase our technician headcount by a net 300 technicians in 2024.
Speaker Change: Which we expect would contribute in.
Speaker Change: Additional $100 million in annualized fixed ops gross profit.
Today, we have increased our technician headcount by a net 131 tax and.
Speaker Change: Paste nearly 30, new tax per month in Q2.
Speaker Change: Michigan positioning us well to achieve this goal in the remainder of 2024.
David Smith: Turning now to the Echo Park segment. We are excited to report a second quarter record Echo Park segment quarterly adjusted EBITDA of $7.2 million. Excluding closed stores, Echo Park segment adjusted EBITDA was $9 million in the second quarter, in line with the first quarter and ahead of our previous guidance for a seasonally lighter second quarter, despite headwinds from the CDK outage at the end of June. For the second quarter, we reported Echo Park revenues of $517 million, down 14% from the prior year, and second quarter Echo Park gross profit of $51 million, which was up 91% from the prior year, despite a significant reduction in store count year over year.
Speaker Change: Turning now to the Echo Park segment.
Speaker Change: We are excited to report second quarter record Echo Park segment quarterly adjusted EBITDA of $7 $2 million.
Speaker Change: Excluding closed stores Echo Park segment, adjusted EBITDA was $9 million in the second quarter in line with the first quarter and ahead of our previous guidance for a seasonally lighter second quarter. Despite headwinds from the CDK outage at the end of June.
Speaker Change: For the second quarter, we reported Echo park revenues of $517 million down 14% from the prior year and second quarter Echo Park gross profit of $51 million, which was up 91% from the prior year. Despite a significant reduction in.
Speaker Change: Store count year over year.
David Smith: Echo Park segment retail unit sales volume for the quarter was approximately 16,600 units, down 3% year over year. However, on a same store basis, which excludes closed stores. Echo Park Retail Unit sales volume was up 23% in the second quarter, revenue was up 10%, and gross profit was up 81%. Echo Park segment total gross profit per unit was $3,078 per unit, up $927 per unit year-to-year, and up $123 per unit from the first quarter, driven by marginal improvements and used wholesale market prices, improving inventory sales velocity, and higher F&I gross profit per unit.
Speaker Change: Echo Park segment retail unit sales volume for the quarter was approximately 16600 units.
Speaker Change: Down 3% year over year. However.
Speaker Change: On a same store basis, which excludes closed stores.
Speaker Change: Echo Park retail unit sales volume was up 23% in the second quarter revenue was up 10% and gross profit was up 81%.
Speaker Change: Echo Park segment total gross profit per unit was $3078 per unit of $927 per unit here and up $123 per unit from the first quarter driven by marginal improvements and used wholesale market pricing.
Improving inventory sales velocity and higher F&I gross profit per unit.
David Smith: As discussed on our previous earnings calls, the reductions to our store footprint since the first quarter of 2023 allowed us to better allocate inventory across the platform, driving higher unit sales volume per rooftop. Better Total Variable GPU, and a second consecutive quarter of positive adjusted EBITDA. Our unwavering confidence in Ecoparks' long-term potential has allowed us to weather the challenges in the used vehicle market in recent years, and we believe our performance in the second quarter demonstrates a tremendous opportunity for this brand.
Speaker Change: As discussed on our previous earnings calls the reductions to our store footprint.
Speaker Change: Since the first quarter of 2023 allowed us to better allocate inventory across the platform driving higher unit sales volume per rooftop.
Speaker Change: Better total variable GPU and a second consecutive quarter of positive adjusted EBITDA.
Speaker Change: Our unwavering confidence in <unk> long term potential is allowed us to weather the challenges in the used vehicle market in recent years and we believe our performance in the second quarter demonstrates a tremendous opportunity for this brand.
David Smith: A second consecutive quarter of positive segment adjusted EBITDA for Echo Park validates the strategic adjustments we've made over the past few quarters, and we look forward to resuming disciplined long-term growth for Echo Park as used vehicle market conditions continue to improve in the coming years. For the second quarter, we generated revenues of $39.6 million, gross profit of $10.7 million, and adjusted earnings even to $2.3 million. As expected, the Powersports selling season began to ramp up in April, and we are really looking forward to maximizing the benefits of this year's Sturgis Rally, which kicked off this past week.
Speaker Change: A second consecutive quarter of positive segment adjusted EBITDA for Echo Park validates the strategic adjustments, we've made over the past few quarters and we look forward to resuming disciplined long term growth for Echo Park as used vehicle market conditions continue to improve in the coming years.
Speaker Change: Turning now to our power sports segment.
Speaker Change: For the second quarter, we generated revenues of $39 6 million gross profit of $10 7 million and segment adjusted EBITDA of $2 $3 million.
Speaker Change: As expected the power sports selling season began to ramp up in April and we are really looking forward to maximizing the benefits of this year's Sturgis rally, which kicked off this past week.
David Smith: We continue to focus on identifying operational synergies within our current PowerSports network while fine-tuning our PowerSports playbook. In the near term, we look forward to implementing our refined F&I sales strategy, centralized marketing, and Inventory Management, and the rollout of sonicpowersports.com. While we are taking a disciplined approach to expansion in this segment, we remain optimistic about future growth opportunities in this adjacent retail sector when the time is right. Finally, our diversified cash flow streams continued to benefit our overall financial position in the second quarter, despite operational disruptions from the CDK audit.
Speaker Change: We continue to focus on identifying operational synergies within our current power sports network, while fine tuning our power sports Playbooks.
Speaker Change: In the near term, we look forward to implementing a refined F&I sales strategy centralized marketing and inventory management and the rollout of Sonic power sports Dot com.
Speaker Change: While we are taking.
Speaker Change: A disciplined approach.
Speaker Change: To expansion in this segment, we remain optimistic about the future growth opportunities in this adjacent retail sector. When the time is right.
Speaker Change: Finally, our diversified cash flow streams continued to benefit our overall financial position second quarter. Despite operational disruptions from the C. D K outage.
David Smith: Turning to our balance sheet, we ended the second quarter with $885 million in available liquidity, including $467 million in combined cash and floor plan deposits on hand. We continue to maintain a conservative balance sheet approach with the ability to deploy capital strategically as the market evolves. Additionally, I'm pleased to report today that our Board of Directors has approved a quarterly cash dividend of $0.30 per share, payable on October 15, 2024, to all stockholders of record on September 13, 2024.
Speaker Change: Turning to our balance sheet. We ended the second quarter was $885 million in available liquidity, including $467 million in combined cash and floorplan deposits on hand.
We continue to maintain a conservative balance sheet approach with the ability to deploy capital strategically as the market evolves.
Speaker Change: Additionally, I'm pleased to report today that our board of directors approved a quarterly cash dividend of <unk> 30 per share payable on October 15th 2024 to all stockholders of record.
Speaker Change: On September 13 2024.
David Smith: As you can see in the investor presentation we released this morning, we are reaffirming our limited financial guidance for 2024 following our second quarter results. We continue to believe that lower franchise dealership segment earnings can be at least partially offset by significant improvements in the Echo Park segment results, returning to positive Echo Park segment adjusted EBITDA for the year, as well as a moderate increase in power sport segment income year over year.
Speaker Change: As you can see in the Investor presentation. We released this morning, we are reaffirming our limited financial guidance for 2024, following our second quarter results.
Speaker Change: We continue to believe that lower franchise dealership segment earnings can be at least partially offset by significant improvements in the Echo Park segment results returning to positive Echo Park segment adjusted EBITDA for the year.
Speaker Change: As well as a moderate increase in power sports segment income year over year.
David Smith: Prior to the CDK outage, we were projecting a second consecutive quarter of year-over-year EPS growth, demonstrating the value of our diversified business model in the current environment compared to a traditional franchised-only model. In closing, Our team remains focused on near-term execution and adapting to ongoing changes in the automotive retail environment and macroeconomic backdrop while making strategic decisions to maximize long-term returns. Furthermore, we continue to believe our diversified business model provides significant earnings growth opportunities in our eco parking and power sports segments that may help offset any industry-driven margin headwinds we may face in the franchise business, minimizing the earnings downside to consolidated Sonic results over time.
Speaker Change: Prior to the CDK outage, we were projecting a second a second consecutive quarter of year over year EPS growth demonstrating the value of our diversified business model in the current environment compared to a traditional franchise only model.
Speaker Change: In closing.
Speaker Change: Our team remains focused on near term execution and adapting to ongoing changes in the automotive retail environment and macroeconomic backdrop, while making strategic decisions to maximize long term returns.
Speaker Change: Furthermore, we continue to believe our diversified business model provides significant earnings growth opportunities and our echo parking and power sports segments that may help offset any industry driven margin headwinds, we may face in the franchise business minimizing the earnings downside to consolidated Sonic.
Speaker Change: Alts overtime.
David Smith: We remain confident that we have the right strategy and the right people and the right culture to continue to grow our business and create long-term value for our stakeholders. This concludes our opening remarks, and we look forward to answering any questions you may have. Thank you.
Speaker Change: We remain confident that we have the right strategy and the right people and the right culture.
Speaker Change: To continue to grow our business and create long term value for our stakeholders.
Speaker Change: This concludes our opening remarks, and we look forward to answering any questions. You may have thank you.
Operator: Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the start button. One moment, please, while we poll for questions. Our first question comes from Bret Jordan with Jeffries. Please proceed with your question.
Speaker Change: Thank you we will now be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May Press Star two if you would like to remove your question from the queue.
Speaker Change: Since using speaker equipment, it may be necessary to pick up your handset before pressing the star.
Speaker Change: One moment, please only pull for questions.
Speaker Change: Okay.
Speaker Change: Our first question comes from Bret Jordan with Jefferies. Please proceed with your question.
Bret Jordan: Hey, good morning, guys. [inaudible] Just sort of an economic backdrop question, and I guess maybe as it relates to customer payment service or power sports.
Bret Jordan: Hey, good morning, guys good morning, Brian.
Speaker Change: Okay.
Bret Jordan: The economic backdrop question and I guess, maybe as it relates to customer pay service or power sports.
Bret Jordan: Did you see anything notable as the quarter progressed as far as consumer deferral on the service side or a retail traffic or conversion power sports really sort of a macro question.
Unknown Executive: Not at all.
Bret Jordan: No not at all this is Jeff not at all.
Bret Jordan: Matter of fact on power sports.
Jeff: It continued to get stronger as the quarter as the quarter went on and that continues.
Jeff: In July and August it means season for power sports now and with the rally going on.
Jeff: We are jam packed.
Jeff: In terms of customers coming through the rally.
Unknown Executive: Okay. And then on new unit GPUs, I think you're talking about a settling point of 2,500 to 3,000 at some point next year. Is the cadence of softening slowing just as a result of a slowing inventory build? I guess you did a bit better than we were expecting on front-end GPUs and new this quarter. What do you attribute the recent stability to?
Speaker Change: Okay, and then on new unit GPU, I think you're talking about 20.
Speaker Change: 2500, or 3000 at some point next year.
Speaker Change: Is the cadence of softening slowing just.
Speaker Change: As a result of a slowing inventory build I guess, you did a bit better than we were expecting on front end Gpus and new this quarter.
Speaker Change: Sort of what do you attribute the recent stability to me.
Unknown Executive: I mean, some of that is mixed-driven; Toyota's margins are still good, they've got a 15-day supply of product on the ground, and that brand is just on fire. But quite honestly, it's a tale of two cities, because you've got other brands, Stellantis, Nissan, you know, some of these brands have 100, 200-day supply of product out there that are just, you know, ridiculous, that we're fighting against in terms of managing age, which reduces, you know, the front-end PUR.
Speaker Change: I mean, some of that is mix driven Toyota margins are still good they've got a 15 day supply of product on the ground and that brand is just on fire.
Speaker Change: But quite honestly, it's a tale of two cities because you've got other other brands are still Lantus. Nissan you know some of these brands are 100, 200 day supply of product out there that are that are just ridiculous.
Speaker Change: We're fighting against in terms of in terms of managing our age.
Speaker Change: Which reduces them you know the front end fee you are but we should settle in in that 2500 to 3000 member I think we'll exit the year at 3000, maybe a little bit better.
Unknown Executive: But we should settle in, in that 2,500 to 3,000 number; I think we'll exit the year at 3,000, maybe a little bit better. And some of that's just mixed-driven; there are more incentives right now; high-line incentives are out there. I expect that to get even more aggressive in the third quarter and the fourth quarter, especially as the manufacturers try to balance out some of this BEV electric vehicle inventory that they're trying to reduce day supply on. And we're starting to see some really, really aggressive Mercedes-Benz incentives these last couple of days, so it ought to be a big, big Mercedes.
Speaker Change: And some of that's just mix driven theres more incentives right now hotline incentives are out there I expect that to get even more aggressive in the third quarter and the fourth quarter.
Speaker Change: Especially as the manufacturers try to balance out some of this bev electric.
Speaker Change: Electric vehicle inventory.
Speaker Change: They're trying to reduce days supply on them and we're starting to see some really really aggressive Mercedes Benz just got super aggressive on incentives. This this last couple of days so it ought to be a big Big Mercedes.
Speaker Change: A month and quarter Yeah. This is Chris.
Unknown Executive: Thank you, I really appreciate the call. The degradation in the front end GPU was the lowest year-over-year since December of 2022 and sequentially since December of 2022. So we do see the cadence of slowing based on Q-Tuesday.
Alright I appreciate the color you look at Q2.
Speaker Change: The degradation in the GPU was the lowest year over year since December of 'twenty, two and sequentially December 'twenty. Two so we do see the cadence of slowing based on Q2's data.
Speaker Change: Yep Yep.
Speaker Change: Yeah.
Operator: Our next question comes from Rajat Gupta with J.P. Morgan. Please proceed with your question.
Speaker Change: Our next question comes from Rajeev <unk> with J P. Morgan. Please proceed with your question.
Rajat Gupta: Great, thanks for taking the questions. I just had like two or three ones.
Rajeev: Great. Thanks for taking the questions I, just haven't decided like two or three ones Uh huh.
Speaker Change: In the slide deck you highlighted.
Speaker Change: The chart on you know less than five year old supply of used cars.
Speaker Change: And it makes it an offence.
Unknown Executive: In the slide deck, you highlighted the chart on the less than five-year-old supply of used cars, and it makes a ton of sense. In the past, I think you've mentioned that you feel confident navigating these supply challenges as it relates to Echo Park. So just curious, I mean, because you have that slide there and then the chart, which is pretty explicit. How should we think about Echo Park volumes, you know, in 2025? Should we expect it to drop year-over-year because of the supply challenges, or would the pace of sharing gains that you're seeing help offset that? Any color you can give us on 2025 Echo Park in context of supply would be helpful.
Speaker Change: In the past I think you've mentioned that you feel confident navigating these supply challenges as it relates to Echo Park.
Speaker Change: So just curious I mean.
Speaker Change: Because you have that slide there in the chart.
Speaker Change: He expressed that.
Speaker Change: How should we think about Echo Park Walliams you.
Speaker Change: You know in 2025.
Speaker Change: We expect it to drop year over year because of the supply challenges are.
Speaker Change: Or the pace of share gains are you seeing what would help offset.
Speaker Change: Any color you can give us on 2020 five.
Speaker Change: So that's why it would be helpful and I have a quick follow up.
Unknown Executive: Well, this is something we talk about a lot. You know, it's interesting that you ask this question because, you know, what we were just talking about, the new vehicle day supply, is actually going to benefit Echo Park.
Speaker Change: Well. This is something we talk about a lot you know it's interesting.
Speaker Change: You asked the question because we're just talking about the new vehicle days supply.
Speaker Change: That's actually going to benefit our Echo Park.
Unknown Executive: If you look at the amount of new car inventory that's out there today, that just defines that there will be plenty of pre-owned inventory as we move into 2025. We're expecting better volumes. You know, we can buy for the 17 existing Echo Park stores pretty easily right now. That's not a problem.
Speaker Change: Greatly.
Jeff Reserve: This is Jeff reserve. This if you look at the amount of new car inventory. That's out there today you know that just defines that theres going to be plenty of pre owned inventory as we move into 'twenty five.
Speaker Change: We're expecting better volumes.
Speaker Change: We can buy for the 17 existing Echo park stores pretty easily right now that's not a problem and I think youre seeing 5500 to 6000 cars a month as the prices continue to drop I think that group of stores can do 85 crore.
Unknown Executive: And I think, you know, you're seeing 5,500 to 6,000 cars a month as the prices continue to drop. I think that group of stores can do up to 85 cars a month. That's 500 or so units per store, which is kind of where we were, kind of the low end of where we were on a per rooftop basis prior to COVID. It's important to know that we've actually achieved that before. Yeah, so we were in the 550 range, and I think we'll get back to that with this group of stores.
Speaker Change: Cars a month, so that's 500 or so units per store, which is kind of where we were kind of the low end of where we were in kind of per rooftop basis prior to COVID-19 that support that.
Speaker Change: We've actually achieved that before yes. So we were in the $5 50 range and I think we'll get back to that with this group of stores.
Unknown Executive: And as we begin to approach that, then you'll see us begin to look at opportunities to continue to open stores again and grow the brand. We're waiting patiently because I'd like to see the average cost per unit drop another 1,000, 1,500 bucks. But that's coming. With the daily supplies, the manufacturers can't help themselves. We didn't learn a lesson in COVID. I wish we would have.
And as we begin to approach that then you'll see us begin to look at opportunities to continue to begin to open stores again and grow the grow the brand.
We're waiting patiently because I'd like to see the average cost per unit drop another thousand 1500 Bucks, but that's coming with the day supplies. The manufacturer can help themselves. We didn't learn a lesson and go that I wish we would have been a lot better for the industry overall, but they didn't and you've got.
Unknown Executive: It would have been a lot better for the industry overall, but they didn't. And you've got manufacturers out there that have just totally lost control of their daily supply, and it's going to cost them big time in terms of incentives. The winner here is the consumer. They pay a lot less for a vehicle over time. And that's going to trickle down into the pre-owned side of the business. There will be plenty of inventory.
Speaker Change: Manufacturers out there that are just totally lost control of their days apart.
Speaker Change: And it's going to cost them big time in terms of incentives. The winter here is the consumer and they pay a lot less on a per vehicle over time.
Speaker Change: And that's going to trickle down into the pre owned side of the business is going to be plenty of inventory, we're not concerned at all with <unk>.
Unknown Executive: We're not concerned at all with being able to supply Echo Park and or our franchise stores as we move forward into 2025. The picture is getting better, not getting worse, as we watch new car inventories grow in the marketplace. Yeah, thank y'all.
Speaker Change: Being able to supply Echo park into our franchise stores as we move forward into 'twenty five. It gives you the picture is getting better not getting worse.
Speaker Change: As as we watch new car inventories grow in the marketplace. I think also just to add this as he does that I think we've done a better job of buying cars on the streets that were not so good.
Unknown Executive: Yeah, I think also, just to add this as Heath, I think we've done a better job of buying cars off the street, so we're not so dependent on wholesaling, and we also don't have the road cars in the auction lanes anymore, so it makes it a lot easier to get enough vehicles to staff that Echo Park.
Speaker Change: And then on the on wholesale.
Speaker Change: And.
Speaker Change: We also we don't have their own cars and not in the auction lanes any longer so it makes it a lot easier to get enough vehicles to stop that.
Unknown Executive: Got it. Got it. That's, that's clear. And did you quantify the CDK impact on Echo Park volumes in the quarter in any way?
Speaker Change: Got it got it.
Speaker Change: That's clear.
Did you quantify like the CDK impact on Echo park volumes in the quarter anyway.
Speaker Change: Any way to like John stack.
Speaker Change: Yeah, a little kind of kind of overall, it's about 500 units or so for the Echo Park.
Speaker Change: Rand and about 3000 units New news with 800, a piece on the franchise side.
Speaker Change: Got it got it.
Speaker Change: One quick follow up on the F&I.
Speaker Change: What's driving this continued pickup there.
Speaker Change: Is it attach rate.
Speaker Change: With you on Echo Park is the attach rate that's going up.
Speaker Change: Some price increases on the products itself I know like Carmax recently raised prices for their Max care products.
Speaker Change: I'm just curious like if you could like.
Speaker Change: Yeah.
Speaker Change: The bridge that a little more.
Speaker Change: Product penetration and that's that's just if we're selling more warranties.
Speaker Change: So having more products per car.
Speaker Change: Our team is executing at a very high level and that makes a big difference in terms of our performance on the back end.
Speaker Change: Got it got it great. Thanks for all the color I'll jump back in queue.
Unknown Executive: Is there any way to like them?
Speaker Change: I think again this is David I think I noted on the opening remarks about the.
Speaker Change: And being.
Unknown Executive: Yeah, so kind of overall, it's about 500 units or so for the Echo Park brand, and about 3,000 units new and used, 1,500 apiece on the franchise side.
Speaker Change: Being number one Echo park team is number one and are in the pre owned market and guest experience and you know when youre offering that kind of world class guest experience, that's certainly going to contribute to that GPU.
Unknown Executive: Got it. Got it.
Speaker Change: Got it okay, great great. Thanks for the color and good luck. Thank.
Speaker Change: Thank you.
As a reminder, if you would like to ask a question. Please press star one on your telephone keypad.
Unknown Executive: Just, just one quick follow up on the F&I. You know, what's driving this continued pickup there? Is it the thatch rate, and especially in Echo Park, I mean, is it the thatch rate that's going up? You know, are there like some price increases on the products itself? You know, CarMax recently raised prices for their MaxCare products. I was just curious if you could, like, help us bridge that a little more.
Speaker Change: Our next question comes from John Murphy with Bank of America. Please proceed with your question.
Speaker Change: Hi, Good morning, guys. This is Billy Healy on for John.
Speaker Change: Yeah.
Unknown Executive: Thanks. It's product penetration, and that's just it. We're selling more warranties, selling more products per car. Our team's executing at a very high level, and that makes a big difference in terms of our performance on the back end. Got it. Got it. Great. Thanks for all the color of the jump. I think again, this David, I think it
Billy Healy: So I just wanted to ask you guys. If you can talk to what Youre seeing on the overall health of the consumer in a new vehicle demand and what are the trends been in terms of like mix and trim levels.
David Smith: I think again, this is David. I think I noted in the opening remarks about being number one. The Echo Park team is number one in the pre-owned market and guest experience, and when you're offering that kind of world-class guest experience, that's certainly going to contribute to that GPU.
Unknown Executive: Got it. Got it. Great. Thanks for the color and good luck. Thank you.
Operator: As a reminder, if you would like to ask a question, please press star one on your telephone. Our next question comes from John Murphy with Bank of America. Please proceed with your question.
Unknown Caller: Good morning guys, this is Billy Healy on for John. Good morning! So I just wanted to ask you guys if you can talk about the overall health of the consumer and new vehicle demand and what the trends have been in terms of like mix and trim levels. What do you expect for new vehicle pricing for the rest of the year? This is Jeff Dyke, so I've been with Day Supply.
Billy Healy: Do you expect for new vehicle pricing for the rest of the year.
Jeff Dyke: This is Jeff Dyke. So, you know, with the day supply going up, pricing is going to come down, and sales are going to get better, so it's better for the consumer. The mix is good. I mean, there's just tons of inventory, and you look at our Chrysler brand north of a 200-day supply, a Nissan brand around a 100-day supply, which is just absurd for the industry, but... I think, like I said earlier, the consumer wins here.
Billy Healy: <unk>.
Jeff Dyke: This is Jeff Dyke.
With our day supply going up pricing is going to come down incentives are going to get better so better for the consumer mix.
Speaker Change: Mix is a good thing there's just tons of inventory and you look at.
Speaker Change: Or Chrysler brand North of a 200 day supply I mean, some burning around 100 days supply.
Speaker Change: <unk>, which is just observed for the industry, but.
Speaker Change: I think like I said earlier, the consumer wins here.
Jeff Dyke: The import brands are doing a really, really good job of controlling their inventory. Toyota's in really great shape for us, around 15 days, Honda sitting between 30 and 40 days, Hyundai in the 50-day range, and Subaru in the 30-day supply range. So they're doing a really, really good job. The high lines are fighting a little bit. I mean, there are a couple that are out there that are a little higher.
Speaker Change: The import brands are doing a very very good job of controlling their inventory Toyota is in really great shape for us around 15 days under sitting between 30 and 40 days.
Speaker Change: Hum in the 50 day range Subaru in.
Speaker Change: In the 30 days apart range, so they're doing a really really good job. The high lines are fighting a little bit I mean, there are a couple that are out there that are a little higher than Mercedes is running in the upper 80 days apart range 90 day supply of BMW is doing a great job in keeping their day supply low.
Jeff Dyke: Mercedes is running in the upper 80-day supply range, and 90-day supply. BMW's doing a great job keeping their day supply low. Audi is sitting at a higher day supply with new cars coming in here, hopefully, towards the end of the year, the first quarter. But overall, we're sitting at a 60-some-odd day supply of new vehicles, and the inventory is very healthy, obviously, with that amount of cars on the ground. BevMix is going to get a little bit better as the year goes on.
Speaker Change: Audi.
Speaker Change: You know sitting at a higher day supply with new mix coming in here.
Speaker Change: Here hopefully towards the end of the year in the first quarter.
Speaker Change: But you know overall, we're sitting at 60, some odd day supply of new vehicles.
Speaker Change: And inventory is very healthy obviously with the amount of cars on the ground Bev.
Bev: Bev mix is going to get a little bit better I think as the year goes on manufacturers are really starting to move.
Bev: Towards eliminating some.
Jeff Dyke: Manufacturers are really starting to move towards eliminating some of their day supply of electric vehicles, which is great. We're sitting at some 14, 15, maybe close to 20-day supply on electric vehicles across the board. And I expect that to continue to drop off and to really sort of meet demand. So I think the manufacturers in the industry learned a big lesson, overproducing a lot of electric vehicles when the consumer demand was not there, obviously higher on the West Coast, higher on the coast, but not in the middle of the country.
Bev: Some of their day supply of electric vehicles, which is great.
Bev: We're sitting at some 14 15, maybe close to 20 day supply.
Bev: On electric vehicles across the board.
Bev: Hum and I expect that to continue to drop off.
Bev: And to really start to sort of meet demand so.
Bev: So I think the manufacturers in the industry learned a big lesson over producing a lot of electric vehicles when the consumer demand was not there.
Bev: Obviously higher in the west coast or on the coast, but.
Bev: But not in the middle of the country.
Jeff Dyke: So I think that the right side is between now and the end of the year, which is great. And hopefully, you know, the manufacturers get a big wake-up call with some of the incentive dollars that they're going to have to spend between now and the end of the year to right-size some of the manufacturers to right-size their inventory. Again, Toyota and Honda, those guys do a fantastic job of managing their supplies.
Bev: So I think that right sizes between now and the end of the year, which is great and hopefully you know the manufacturers get a big wake up call.
Bev: With some of the incentive dollars that they're going to have to spend between now and the end of the year to rightsize some of the manufacturers to rightsize their inventory again for you to honor those guys are doing a fantastic job in managing day supply so.
Jeff Dyke: I think it's a bright picture between now and the end of the year. I think there's going to be front-end margin pressure, along with margin pressure at the manufacturer level, to reduce inventory levels, and hopefully, you know, they can look back and say, you know, we really did learn a good lesson during COVID. We need to control our inventory better than they've been controlling it, you know, over the last quarter or two because, in many, many cases, it's been just a complete shitshow, if you will.
Bev: I think it's a bright picture between now and the end of the year I think there's gonna be front end margin pressure.
Bev: Along with margin pressure at the manufacturer level.
Speaker Change: Inventory levels and hopefully they can look back and say you know, we really did learn a good lesson during COVID-19, we need to control our inventory better than what they've been controlling it you know over over the last quarter or two because it's in many many cases, it's been just a complete <expletive> show if you will.
Speaker Change: Hi, Thanks.
David Smith: We have reached the end of our question and answer session. I would now like to turn the floor back over to David Smith for closing comments.
Speaker Change: We have reached the end of our question and answer session I would now like to turn the floor back over to David Smith for closing comments.
David Smith: Great. Thank you very much. Thank you, everyone. We appreciate you, and we'll talk to you on the next call.
David Smith: Great. Thank you very much. Thank you everyone. We appreciate you and we will.
David Smith: Talk to you on the next call. Thanks.
Operator: This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.
Speaker Change: This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.
Operator: Copyright 2013 Mooji Media Ltd. All Rights Reserved. No part of this recording may be reproduced without Mooji Media Ltd.'s express consent.
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